Tuesday Links: The Great Ambiguity, ARMs Crisis, Bailing Out

The New York Times handles the economic-stats news well today with a story that points out the bright spots in the short-term data while warning about the dangers of the long-term drags still out there—something that’s created what Peter S. Goodman calls the “Great Ambiguity”:

Much of the improvement in manufacturing — a small slice of the American economy — is the result of businesses rebuilding inventories after slashing them. The economy has also been stoked by $787 billion in federal spending aimed at stimulating growth, a force that will be largely exhausted by the middle of the year.

Those skeptical of lasting recovery assert that, once businesses have rebuilt inventories and federal largess runs dry, the economy will confront the same assortment of ills plaguing it for two years.

Namely, Americans are saturated in debt and nervous about job prospects, prompting many to hunker down in a mode of thrift; businesses still spooked by dysfunction in the financial system are reluctant to hire more workers until recovery proves real; and a cataclysmic drop in home prices has diminished spending power in millions of households, with another decline possible as foreclosed properties surge onto the market.

— Bloomberg takes on the latter here with a piece on why the housing bust isn’t over. All those prime adjustable-rate mortgages are going bad at a rapidly increasing rate.

The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Shiller and Wellesley College’s Case said.

Meanwhile, Tim Cavanaugh over at Reason points to new research that says the ARM, not subprime, is to blame for the whole shebang, saying “Believe It Or Not, They Have Found Another Way To Blame Poor People”:

This has not been a “subprime” mortgage crisis at all… Instead, by far the most important determinant of default — and the common feature of nearly all defaults since 2006 — is whether the mortgage has an adjustable interest rate…

(h/t Atrios)

Arianna Huffington and Rob Johnson are calling for Americans to bail out of the big banks they’ve been bailing out. Felix Salmon is on board, too. Last month, I opened checking and savings accounts at a Seattle credit union for similar reasons and am in the process of unwinding my Bank of America accounts.

The big banks on Wall Street, propped up by taxpayer money and government guarantees, have had a record year, making record profits while returning to the highly leveraged activities that brought our economy to the brink of disaster. In a slap in the face to taxpayers, they have also cut back on the money they are lending, even though the need to get credit flowing again was one of the main points used in selling the public the bank bailout. But since April, the Big Four banks — JP Morgan/Chase, Citibank, Bank of America, and Wells Fargo — all of which took billions in taxpayer money, have cut lending to businesses by $100 billion.

Meanwhile, America’s Main Street community banks — the vast majority of which avoided the banquet of greed and corruption that created the toxic economic swamp we are still fighting to get ourselves out of — are struggling. Many of them have closed down (or been taken over by the FDIC) over the last 12 months. The government policy of protecting the Too Big and Politically Connected to Fail is badly hurting the small banks, which are having a much harder time competing in the financial marketplace. As a result, a system which was already dangerously concentrated at the top has only become more so.

It’s doubtful there’s going to be any real anti-TBTF movement of the people, but I can tell you it sure feels good to leave ol’ BofA.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.